Insolvency and Bankruptcy (Amendment) Act, 2019 – The ‘change’ the ‘changes’ will bring

Background

It has been almost 3 years since the Insolvency and Bankruptcy Code, 2016 (“Code”) came into effect. Thereon, the Code during its implementation has met several challenges and overcame them. However, certain grey areas, both legal and technical still persist. In order to give more effectiveness to the Code and providing a strict time bound resolution, Insolvency and Bankruptcy (Amendment) Act, 2019 (“Amendment”) was introduced by the Hon’ble Finance Minister and the same was recently passed by the Parliament and subsequently notified on August 6th, 2019 after receiving assent from the Hon’ble President. The Amendment considerably attempts to restrict judicial intervention, provide quicker resolution process and ensure equitable relief to all the creditors. However, the same will have to face the test of time as well as the scrutiny of judicial forums which within 3 years has already been overburden with cases in view of the strict timeline set in the Code. Hereinbelow, we discuss the important changes that have been brought to the Code as a result of the Amendment.

Considering mergers, amalgamations and demergers as an option for resolution

Mergers, amalgamations, demergers were always a considerable option under a resolution plan. Yet confusion existed with regard to the same, as they were not expressly provided under the Code. Hence, to provide functional clarity to the ‘Committee of Creditors’(“CoC”), the word ‘Resolution Plan’ as defined under Section 5(26) of the Code has been amended to include an explanation clause which clarifies the restructuring plan of corporate debtor may include ‘merger, amalgamation and demerger’ as its provisions.

Simplifying the authorized representative’s voting duty

Purposefully to make it simpler and clearer for the authorized representative (“AR”) in respect of casting his vote on behalf of each of the financial creditors, the Amendment adds a new provision i.e. sub-section (3A) to Section 25A of the Code. The sub-section states that the AR, during the voting process for Corporate Insolvency Resolution Process (“CIRP”), has to vote on behalf of each financial creditor he is representing in consonance with the decision taken by more than 50% of the voting share of each financial creditor. However, the proviso to aforesaid sub-section (3A) clarifies the newly added sub-section does not apply to case of withdrawal of the insolvency application under Section 12A of the Code.

Discorded adjustment

In a balancing move to settle the discord amongst the financial creditors which arose after the NCLAT’s judgment in Essar Steel case¹ wherein NCLAT modified the resolution plan to the extent of treating the Operational Creditor and Financial Creditor at parity, and to recompense the Operational Creditor, the Amendment brought by the Govt. comprehensively amends clause (b) of section 30 (2) of the Code. The Amendment modifies the criterion laid down in foregoing clause qua operational creditor for the resolution professional (“RP”) to examine while considering a resolution plan. The RP now has ensure that the operational creditor receives a higher amount either - (i) which is not less than the liquidation value of its debt; or (ii) which it would have received if the amount was distributed under the resolution plan as per the preference set out in Section 53 (1) of the Code².

Further while considering the resolution plan, the RP has to ensure qua dissenting financial creditor (financial creditor voting against the resolution plan) that it get an amount which is not be less than the amount to be paid to such creditor, in order of preference set out in Section 53 (1) of the Code, in the event the corporate debtor was liquidated.

Two explanations have also been provided to the aforesaid amended clause. The first explanation provides that the RP should ensure that the distribution of money takes place in a fair and equitable manner to each creditor. The second explanation provides that the amended clause will be applicable to the on-going/pending CIRP on three conditions i.e. - (i) when the resolution plan is under consideration before NCLT; (ii) an appeal is preferred under section 61 and pending consideration before NCLAT or appeal under section 62 and pending decision before Hon’ble Supreme Court or such appeal is not time bared; or (iii) where legal proceeding has been initiated in any court against the decision of NCLT in respect of the resolution plan.

Equitable distribution amongst all classes of creditors

With a view to provide a guiding tool for the CoC as well as the RP to contemplate and consider providing equitable relief to all the creditors while approving a resolution plan under sub-section (4) of the Section 30 of the Code, the Amendment insert the words ‘the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53(1), including the priority and value of the security interest of a secured creditor’ to the following section after the words ‘feasibility and viability’.

Restricting interferences

Extending the binding effect of the resolution plan once approved by NCLT and restricting unnecessary interference from the governmental authorities, the amended section 31 of the Code now binds the Central Government, State Governments as well as local authority(ies) against whom debt has accrued from Corporate Debtor, Apart from being binding to Corporate Debtor, its employees, members, creditor, guarantor and other stakeholders.

Limiting the time-limit

Time is the essence of the Code. Code earlier prescribed a time period of 270 days to complete CIRP which included 90 days extension period. However, the same seems to have been breached on numerous occasions e.g. Essar Steel Case, Bhusan Steel Case, Binani Cements etc. Further, the Supreme Court order in one of the case³ held that the time consumed in litigation to be excluded from the 270 days’ time period of CIRP, and furthermore in some cases directing the CoC to reconsider the resolution plan even after the expiry of 270 days in the name of ‘larger public interest’ and ‘interest of justice’ which gave a severe blow to legislature assurance to the creditors for time bound resolution of debts.

The Code wasn’t achieving its primary purpose of providing quick and time bound resolution as it meant to be in respect having a resolution plan during CIRP or otherwise liquidation of the corporate debtor. Legislature set the time line with a target of having effective resolution set-up and improving India’s ranking in the ease of doing business, which was seriously affect due to extreme judicial impediment. To negate the adversity, the Amendment amends the different provisions wherein time-period has been prescribed.

Section 7(4) of the Code has been amended and a proviso has been provided which states that NCLT is now impelled to ascertain the existence of dispute within 14 days from the day of receipt of application filed by the financial creditor, failing which the NCLT, in its order, has to provide the reason(s) for the delay in ascertaining the existence of dispute.

In addition to the existing Proviso to Section 12(3) of the Code which restricts the grant of extension by NCLT to only one time, to complete CIRP, two more stringent provisos have been added. Firstly, is an oxymoron in nature which on one hand extends the time period to complete CIRP and on other provides limitation to mandatorily complete CIRP within 330 (180+90+60) days. In order to further reduce the delay cause due to prolong judicial intervention or for whatever reasons thereof, and also partial overthrow the Supreme Court order2 dissecting time period for litigation and CIRP, the Proviso further provides that the time period of 330 days to be inclusive of time taken in legal proceedings as well as extended time period provided/sought to complete the CIRP. This creates onus on the judicial forums to expedite as well as dispose of the application(s), appeal(s) or objection(s) at the very first possible instance and also on the RP and CoC to complete the CIRP and finalize the resolution plan within the said time period. Second added proviso is exclusively for the currently on-going and pending CIRP which mandates for completion of CIRP within 90 (Ninety) days from the date when the Amendment is officially notified. Failing to adhere the newly set time period, NCLT can pass appropriate order to liquidate the corporate debtor in accordance with the provisions of Section 33(1)(a) of the Code.

CoC decision to liquidate

Encompassing the stage at which the CoC can take decision with regard liquation of the corporate debtor, the Amendment adds an explanation to Section 33(2) of the Code stating that the CoC can liquidate the corporate debtor any time but it should be done before the confirmation of the resolution plan or preparation of the information memorandum, whichever is later.

Regulation Creditor neutral

Section 240 of the Code empowers the Insolvency and Bankruptcy Board of India (‘IBBI’) to make regulations in respect of the various subject mentioned thereunder. The Amendment in clause (w) of the aforementioned Section, substitutes and replaces the words ‘repayment of debts of operational creditors’with just ‘payment of debts’. The amended clause (w) has been made generic which empowers IBBI to frame regulation in respect of manner of making payment of insolvency resolution cost, payment of debts in respect of all or any of the creditor(s), other requirements for bringing resolution in consonance with Section 30(2)(d) of the Code. Making the aforesaid clause ‘generic’, the Amendment removes the restriction provided for framing of regulation in respect of repayment of debts only for operational creditor.

Conclusion

Prolonged legal proceedings thwarted the legislature claim of faster as well as effective resolution of creditor’s debts which inadvertently affect India’s image as investment friendly destination. Perceptibly, creditors were losing confidence in the Code and India’s hopes for getting in ranking ladder of ease of doing business seems dissipated. Code was seen on the line of other legislation which miserably failed to abide by the statutory time line provided under it. Hopefully, Amendment which stipulates and stricter time frame helps the Code in achieve in full potential and provide effective relief.

Now, it will be difficult for the parties to seek adjournments in view strict time period emulated in the Amendment. Another important aspect which is to be seen is disposal of appeals by NCLAT which is with just one bench at New Delhi and already overburden with appeals from all the NCLTs which leads to delay in deciding the appeal. NCLAT as well as Supreme Court has to persuade themselves in disposing the matter at the very first possible instance. Additionally, it will be captivating to see as to how many times the Supreme Court uses its power under Article 142 of the Constitution of India, 1950 to revive the insolvency process orextend the time frame in the name of ‘larger public interest’ and ‘interest of justice’.

Further, the Amendment is sought to be challenged before the Supreme Court which is already considering with one of the issue which is part of the Amendment. The strict time period of 330 days encompassing time period for both judicial proceedings and CIRP also has to face the test of reasonability and practicality.

1. Standard Chartered Bank v. Satish Kumar Gupta, R.P., Essar Steel & Ors. Company Appeal (AT) (Ins.) no. 242 / 2019

2. Section 53(1) deals with the order of priority with regard to the distribution of proceeds from the sale of the liquidation assets